Are you into cryptocurrency? Well, then you know that the volatile nature of most cryptocurrencies is a major downside. The goal of stablecoins is to be a more stable and predictable cryptocurrency. A stablecoin is a cryptocurrency that has low volatility relative to some reference currency like the US Dollar or Euro.
With these new coins coming out, it’s important for you to figure out which coin will work best for your needs. That’s why we’ve compiled this list of the newest stablecoins so you can decide on what coin will work best for you.
In its simplest form, a stablecoin is a cryptocurrency that is pegged to the value of another asset such as a fiat currency, commodity, or another cryptocurrency. Fiat currencies such as the US dollar (USD) and the euro (EUR) are commonly used to back stablecoins.
Due to the volatility and chaos of the cryptocurrency market, stablecoins have tapped into a market of those seeking a certain level of participation without experiencing wild market swings. When market waves start to appear, traders have a place to breathe when their cryptocurrency behaves like USD, EUR, or any other relatively safe asset.
The Importance of Stablecoins
Among the many applications of blockchain technology, cryptocurrency is the most well-known. Fiat currencies, like USD or EUR, are backed by the confidence the market has in the governments issuing them, whereas stablecoins can be backed by actual assets. Because stablecoins are also pegged, they offer a level of stability during times of uncertainty.
As fiat money provides stability to participants in the non-cryptocurrency financial markets, stablecoins do the same for cryptocurrency investors, traders, and exchanges. When volatility is high, non-crypto investors would allocate money to cash, Treasury bonds, or money market funds, while cryptocurrency investors would move to stablecoins.
Participants in the cryptocurrency market favor stablecoins over traditional ‘risk-off’ assets for a variety of reasons. Staying in the cryptocurrency market allows them to move faster between trades without having to wait days for a fiat money transfer. Also, not all cryptocurrency exchanges support fiat currencies, making stablecoin the only option.
Continually rising participation in the cryptocurrency market has been attributed to stablecoins, as stablecoins provide a means of finding safety in the market. Because of the increased confidence in the cryptocurrency market, more people are choosing to participate.
In order to build greater confidence in the market by providing a ‘safe space’, stablecoins have been able to increase volume, and this volume has contributed to a more efficient cryptocurrency market. A higher level of efficiency also results in better asset pricing, which means a tighter bid/ask spread and a fairer price.
The benefits of stablecoins are immense and have provided a huge gift to the entire cryptocurrency market. Stablecoins provide a ‘risk-off’ instrument, which has strengthened market confidence, made the market grow, and made it more efficient.In spite of this, not all stablecoins work in the same way, so knowing how they work will help you decide which one to use when the time comes.
How Stablecoins Work
A stablecoin’s value is pegged to the value of another asset, but it isn’t always obvious why the market believes they are worth that price. A possible solution many stablecoins have come up with is to keep their collateral equal to the value they claim their crypt is worth.
When it comes to stablecoins, collateral can take several forms, including fiat currency, commodities, and cryptocurrencies. The most common type of collateral, however, is fiat money, especially USD and EUR. Gold and baskets of cryptocurrencies are also collateralized, while some stablecoins rely entirely on algorithms. However, this is quite rare.
The most popular stablecoins are those that can provide the most stability, thus the most predictable, risk-free asset in the cryptocurrency market.While providing a certain level of transparency and market confidence, stablecoins that are most stable are also the best at keeping their collateral up-to-date frequently.
Depending on the type of asset being tracked, it can be challenging to maintain collateral. Fiat money is the simplest and usually works as follows:
- The company managing the stablecoin mints one stablecoin for every $1 worth of a stablecoin you buy. The company managing the stablecoin destroys one stablecoin for every $1 worth of a stablecoin you sell.
There’s a lot of handwaving going on here, but that’s common for all kinds of stablecoins. For the managing company, it’s an uphill battle to ensure that the stablecoin is well-liquid and book-balanced.
Stablecoins’ biggest challenge is trustworthiness. Blockchain was built with trust in mind by offering a decentralized platform that isn’t controlled by any single user and regards each individual as an equal. Stablecoins, however, do not have the luxury of regulating their supply since they must manage a portfolio of assets (collateral) while the supply of their stablecoins is tightly controlled. Therefore, they must maintain a tight ship as it relates to controlling their stablecoin supply.
As a result, stablecoins know what their work entails and they know they have their work cut out for them. That’s why they are as transparent as possible by issuing regular audits (ideally from third parties) and keeping their users updated on the progress of their technology.
Most Traded Stablecoins
Tether (USDT) is the most popular stablecoin in terms of trade volume and circulating supply, while Bitcoin (BTC) is the largest cryptocurrency in terms of market capitalization (unit price multiplied by supply). Stablecoins are used as a means of managing risk when market risk reaches an uncomfortable level or when settling trades, so this shouldn’t come as a surprise.
While most stablecoins are pegged to USD, they do contain distinct features that should be noted. Stablecoins are on the rise as requirements for improved liquidity, speed, and transparency increase.
TETHER – USDT
With the highest market cap and trade volume of any stablecoin, Tether (USDT) has been able to maintain one of the most stable prices while maintaining a $1-pegged target price.
In spite of being the most popular stablecoin, Tether is rather controversial due to the lack of transparency they have regarding their asset reserves. Nevertheless, the market continues to favor Tether over other stablecoins by a wide margin, resulting in them dominating the stablecoin market.
USD COIN – USDC
USD Coin (USDC) is a distant second but is becoming increasingly popular as the cryptocurrency market matures. It is also backed by USD and is based on the Ethererum (ERC20) protocol. USDC is managed by Circle and Coinbase, which are among the biggest bitcoin exchanges.
Besides being trustworthy based on their management companies, USDC also publishes regular reports based on results from third-party audits by an accounting firm. US money transmission laws are fully observed by USDC and all transactions are carried out by established financial firms.
PAXOS STANDARD TOKEN – PAX
Unlike most other stablecoins, Paxos Standard Token (PAX) is backed by dollars and is fully managed by Paxos Trust Company under the auspices of the New York State Department of Financial Services (NYDFS). This cryptocurrency is also built on the ERC20 protocol.
Back in 2018, there was a major trust issue within the market due to allegations that Tether was ‘printing’ Tethers out of thin air. They’re also regularly audited by a number of accounting firms, so their reserves are constantly verified by their audited smart contract technology. PAX has a fully decentralized accounting solution to their stablecoin, making it quite revolutionary.
TRUEUSD – TUSD
During the Tether controversy, TUSD emerged as another USD-backed stablecoin that was accused of using fractional reserve banking. Since TUSD took the stage, they have proven to be a reliable stablecoin that has benefited from the growth of the cryptocurrency market.
They publish their collateralized holdings every day, conduct third-party audits every month, but what makes them unique is that their platform is built on TrustToken. We have a mission to tokenize all types of assets, including real estate, commodities, patents, trademarks, businesses, and more, in order to enable everyone to take part in ‘fractional ownership’ of such assets.
MAKERDAO – DAI
DAI was created to counter the Tether controversies and is a 100% decentralized and trusted stablecoin. While one DAI equals $1, the assets backing that value is a basket of select cryptocurrencies.
The unique characteristic of DAI, apart from its cryptocurrencies-backed status, is that it is always over-collateralized. This means that instead of the underlying assets having a 1:1 ratio, there is a 2-to-1 ratio. This means there is more risk involved. A collateralized debt position (CDP) is the result of this, and it allows them to protect their reserves when their basket of cryptocurrencies experience volatile periods.
Stablecoins and Beyond
There are many types of stablecoins, but all of them share a common purpose: they provide stability to the crypto market. By providing stability on the cryptocurrency market, they’ve effectively invited those market participants that were previously hesitant to enter the market due to its excessive volatility. Investing in cryptocurrencies has also given investors, traders, and exchanges the chance to have a ‘risk-off’ allocation within their portfolios.
USD-backed stablecoins have been the most popular, but fiat money goes far beyond USD. There are likely more stablecoins to come that will serve specific purposes for users. Additionally, some people miss the old gold standard-era currency backed by commodities.
Additionally, stablecoins allow a cryptocurrency to be backed by all kinds of assets. Strictly speaking, stablecoins are just a means of pricing any asset on a decentralized marketplace, which may be the most reliable and efficient method of valuing any asset. That’s one powerful idea and shows a possible path stablecoins may take as well as their future siblings.
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Author
Chris Munch is a professional cryptocurrency and blockchain writer with a background in software businesses, and has been involved in marketing within the cryptocurrency space. With a passion for innovation, Chris brings a unique and insightful perspective to the world of crypto and blockchain. Chris has a deep understanding of the economic, psychological, marketing and financial forces that drive the crypto market, and has made a number of accurate calls of major shifts in market trends. He is constantly researching and studying the latest trends and technologies, ensuring that he is always up-to-date on the latest developments in the industry. Chris’ writing is characterized by his ability to explain complex concepts in a clear and concise manner, making it accessible to a wide audience of readers.
